General Anti Avoidance Rules (‘GAAR’) that became effective from April 1, 2017, enables Revenue to go into the substance of a transaction and to disregard the same if the main purpose of such an arrangement is to obtain tax benefits without any commercial justification for creating such an arrangement. GAAR is an attempt by the Govt. to codify the very thin yet impactful line of difference between tax avoidance and tax planning. Taxsutra Database editorial team in this insight has made an effort to bring to its readers some of the landmark rulings on the aspect of tax avoidance vs. tax planning. Celebrated rulings by the Apex Court in the cases of Mc.Dowell & Co. Ltd., Azaadi Bachao Andolan and Vodafone International Holdings, to name a few, are a part of this Insight.

1. [TS-23-SC-2012-O]: 

Transfer of shares of a foreign company having underlying assets in India in the form of shares in Indian subsidiary not transfer of capital asset in India; Section 9(1)(i) is not a “look through” provision; Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India; No conflict between McDowell and Azadi Bachao or between McDowell and Mathuram Agrawal; Holding Structures are recognized in corporate as well as tax laws; Hutch structure was not created as a sham or tax avoidant…read more 

2. [TS-5-SC-2003-O]: 

Mauritian Tax Residency Certificate sufficient to avail benefits under Indo-Mauritius DTAA - Validity of CBDT Circular No. 789, providing that Mauritian tax residency certificate was sufficient proof to avail benefits under Indo-Mauritius DTAA, upheld…read more

3. [TS-1-SC-1985-O]: 

Tax planning may be legitimate provided it is within the framework of law; Colourable devices cannot be part of tax planning; Excise duty payable on manufacture of liquor, being a liability of manufacturer, should be included in calculation of turnover for determining sales tax liability, even though the excise duty was paid by buyers of assessee through amicable arrangements - SC rules in favour of Revenue; Holds that “excise duty though paid by the purchaser to meet the liability of the appellant, is a part of the consideration for the sale and is includible in the turnover of the appellant.”; Rejects assessee’s contention that it is open to every one to so arrange his affairs as to reduce the brunt of taxation to the minimum…read more 

4. [TS-5000-AAR-2016-O]: 

Mauritius to Singapore share transfer driven by "business-excellence" motive, dismisses tax-avoidance charge - AAR rules that capital gains arising on proposed transfer of Indian group company’s shares by applicant (a Mauritian company) to its Singaporean affiliate not taxable in India, grants India-Mauritius treaty benefit; AAR notes that for the purposes of group’s operational excellence and administrative convenience, it was decided to shift shareholding of Indian arm from Mauritius to Singapore, accordingly it was proposed that a Singaporean entity be set-up by way of applicant contributing its India investment as capital.…read more

5. [TS-5305-ITAT-2016(DELHI)-O]: 

Share-sale within lock-in period to group company sham, STCL disallowed - Delhi ITAT approves CIT(A) order, holds assessee's transaction of purchase and sale of shares with group concern as sham and thus, disallows claim for short term capital loss (STCL); Assessee purchased shares from group company which were subsequently sold to the same group company at a loss, claiming urgency owing to huge tax demand, referring to tax payment challan evidencing payment during March 2009 to January 2010, ITAT opines that “urgency and necessity shown by the assessee in September 2008 or nearby time (time of sale of shares) cannot be held as tenable, acceptable or sustainable”.…read more

6. [TS-5030-ITAT-2016(MUMBAI)-O]: 

Buy-back payment to Mauritian entity not dividend, but exempt capital-gain; TDS inapplicable - Mumbai ITAT holds that amount remitted by assessee to its 100% Mauritian holding company during AY 2011-12 under share buy-back scheme, not taxable in India, Sec 195 TDS not applicable; Rejects Revenue’s stand that excess payment over face value of equity shares so bought back was nothing but distribution of accumulated profits to its ultimate beneficiary/holding company and accordingly assessee was liable to deduct TDS u/s 195 on such deemed dividend income arising to Mauritian entity.…read more 

7. [TS-5873-ITAT-2016(MUMBAI)-O]: 

Applies 'substance' principles; Equity investment with pre-determined return taxable on yearly basis - Mumbai ITAT dismisses assessee’s (Mahindra Telecommunication Investment P Ltd) appeal for AY 2008-09, upholds accrual basis taxation of increase in option price of assessee's investment in shares of AT&T India (investee company); Notes that as per the shareholder agreement between AT&T Global (promoter of AT&T India) and the assessee, AT & T Global (which held 74% of share capital of AT&T India) had an irrevocable call option on assessee's shares while assessee also had an irrevocable option to sell these shares to AT & T Global or its affiliates and the options could have been exercised on or after 3 years of investment or change in Indian Government's telecom FDI regulation, whichever is earlier, at option price pre-determined at equity contribution plus return at 11% p.a. compounded annually.…read more 

8. [TS-5809-HC-2015(DELHI)-O]: 

HC rejects Jindal Group’s 'subterfuge' of contrived losses; Applies 'reasonable business purpose' test - HC reverses ITAT's order, holds transaction of renunciation of rights for subscribing to partly convertible debentures (‘PCDs’) of JISCO (a Jindal Group company) during AY 1992-93, a colourable device to contrive artificial loss; Assessee (a Jindal group company) renounced rights in PCDs in favour of another group company (‘JSL’) at a significantly lower price than market value resulting in significant loss.…read more

9. [TS-509-HC-2014(DEL)-O]: 

Word "substantially" for indirect transfers given 'restrictive' meaning; Sets 50% assets threshold - HC dismisses Revenue’s writ petitions against AAR ruling; Upholds share sale by assessee, Copal group entities (Mauritius based companies) to Moody group entities (being another nonresident group) as not taxable in India, though transaction resulted in ultimate transfer of Indian company’s control to Moody’s group.…read more

10. [TS-252-HC-2013(KAR)-O]: 

Karnataka HC permits 'Loophole' exploitation; share sale effecting immovable property transfer, legitimate tax planning - Long term capital gains exemption u/s 10(38) allowed on sale of shares in a group company that had effect of transferring underlying land; Land was acquired into a listed company and immediate share transfer made to transfer control over the company.…read more